Revenue rises amid an improved spread between interest rates and cost of funds.
The net interest margin and the operating expense ratio are the same for the first time since 2011.
Rising interest rates on loans and investments coupled with efficient internal management has helped the credit union industry make enough to pay for its operating expenses for the first time in seven years.
On a practical basis, this means the average credit union could theoretically eliminate non-interest income and keep the lights on. More to the point, credit unions can use that bolstered bottom line to invest in staff and offerings with an eye toward boosting member service and value.
Year-over-year income growth hit 12.6% as of Sept. 30, 2018. That equates to $54.8 billion in total revenue. It should be noted, though, that the NCUA injected $736 million into the system in dividends paid out this year as a result of the merger of the Temporary Corporate Credit Union Stabilization Fund into the National Credit Union Share Insurance Fund.
Operating expenses increased at a rate of 7.5% and are on track to total $33.2 billion for the year. Annual net income growth was 29.3%, which drove up the aggregate bottom line of the industry to $10.2 billion.
Rising interest rates led to loan and investment income outpacing deposit and borrowing expenses, pushing the net interest margin up 15 basis points to meet operating expenses at 3.12%. This is the first time since March 31, 2011, that the net interest margin has been at or greater than the operating expense ratio.
The Income Portfolio and Total Revenue And Annual Growth charts here show net loan income was still nearly two-thirds of the income portfolio $34.9 billion through the first three quarters of this year. Investment income added another $5.2 billion, or 9.5%, which resulted in total interest income accounting for 73.1% of total credit union income, leaving the rest from fee income and other operating income.
On top: Total industry income grew 12.6% year-over-year, up $6.1 billion from the same point in 2017. On bottom: Other operating income takes a larger piece of the revenue pie this quarter, with a boost from the NCUSIF rebate.
Although interest income comprises most of the income portfolio, non-interest income (NII) is still a significant revenue driver. Fees charged for services like overdrafts, ATMs, and credit cards were up 5.2% year-over-year, a $322.1 million jump since the third quarter of 2017. Other operating income, meanwhile, accounted for 54.4% of NII and includes secondary market sales, interchange income, loan participations, and certain CUSO income. Other operating income, where the NCUSIF dividends are recognized with a one-time gain in 2018, was up 16.6% since the third quarter of 2017; total NII jumped 11.1%.
The chart labeled Yield Analysis shows the industry is generating more income per loan and investment as the rates credit unions charge for loans and receive for investments are rising faster than what credit unions are paying for deposits.
After falling steadily since 2008, yield on loans has risen 12 basis points in the past year to 4.66% as of Sept. 30. Meanwhile, yield on investments has risen 40 basis points in the past year amid aggressive rate rising by the Fed. The increase of 11 basis points in the cost of funds indicates credit unions are returning a portion of this profit to members in the form of dividends.
On top: As the Federal Reserve raises interest rates, both yield on investments and yield on loans are rising at a faster rate than cost of funds. On bottom: The positive income environment is enabling credit unions to invest in themselves, including a 7.3% boost movement-wide in employee compensation and benefits from this point last year.
The graph titled Operating Expense Breakdown shows credit unions are investing in themselves. Credit unions committed 51.2% of all operating expenses to employee compensation and benefits as of third quarter 2018. The total balance of spending on salaries and benefits industrywide jumped 7.3% year-over-year to $17.1 billion through the first three quarters of 2018.
Credit unions added 3.6% more full-time equivalent employees to the industry over the year to keep pace with 4.1% membership growth. Over the same time, revenue increased 12.6%, which indicates a positive return on investment (ROI) in the people who help people, the core ethos of the credit union movement.
On top: The industry’s net interest margin and operating expense ratio are even again, indicating that loan and investment income are covering overhead expenses at credit unions across the country. On bottom: ROA industry-wide held in a tight range until a 17 basis point spike year-over-year in the third quarter of 2018, which was helped along by 5 bps from the NCUSIF refunds.
The increase in ROI is also reflected in the 17-basis-point spike in return on assets (ROA) over the year, to 0.96% as of Sept. 30, 2018. Callahan estimates an increase of 5 basis points to credit union ROA can be attributed to the NCUSIF refunds. The remaining 12 basis points is largely due to the higher yields on loans and investments in the past 12 months.
ROA is an important gauge of a credit union’s profitability. It reveals how much income a credit union generates for each dollar of assets it deploys. Being able to leverage the improved spread between interest paid and interest received with efficient operations and investment in people and products seems to be a winning strategy that portends well for the movement’s future.
This article appeared originally in the Dec. 5, 2018, issue of Credit Union Times.
How Do You Compare?
It only takes minutes to compare various aspects of your lending portfolio to other credit unions with Peer-to-Peer. Compare against credit unions in your state, asset range, or by business model.